Harvard Bioscience, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited consolidated financial statements; filed August 6, 2015.
Business context
Harvard Bioscience develops, manufactures and markets scientific instruments, systems and lab consumables for life-science research. It sells in more than 100 countries. The 2015 results include acquisitions of MCS, TBSI and HEKA; HEKA was acquired in January 2015 for approximately $5.9 million, or $4.5 million net of cash acquired.
Key financial metrics
Amounts below are in millions of dollars, except per-share data.
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $28.8 | $27.0 | $54.6 | $52.9 |
| Gross profit / margin | $12.6 / 43.7% | $12.3 / 45.5% | $24.1 / 44.1% | $24.0 / 45.5% |
| Operating income (loss) | $0.1 | $1.7 | $(1.1) | $3.1 |
| Net income (loss) | $0.3 | $1.0 | $(1.1) | $1.7 |
| Diluted earnings (loss) per share | $0.01 | $0.03 | $(0.03) | $0.05 |
| Operating cash flow | Not separately stated for Q2 | $(1.0) | $2.5 |
At June 30, cash and cash equivalents were $7.4 million, versus $14.1 million at year-end 2014; current assets were $56.5 million and current liabilities $21.2 million. Debt was $20.7 million, including $5.0 million current, and net debt was $13.2 million. The company reported $8.5 million of available borrowing capacity, subject to covenant and working-capital restrictions, and compliance with its financial covenants. Foreign subsidiaries held $6.0 million of cash, which management said was not available for domestic operations unless repatriated.
Changes versus comparable periods
- Q2 revenue rose 6.8% reported; excluding currency effects, it increased 11.5%. First-half revenue rose 3.2% reported and 7.7% excluding currency effects. Acquisitions contributed to growth, while the stronger U.S. dollar reduced reported revenue.
- Gross margin declined in both periods. Management cited inventory fair-value step-up charges, facility consolidation and relocation costs, less favorable product mix, and unfavorable currency translation.
- Operating expenses increased, notably R&D (up 33.5% in Q2 and 53.4% in the first half), with acquisitions among the primary drivers. First-half other expense included $0.8 million of acquisition-related costs.
- Cash used in operations was $1.0 million in the first half, compared with $2.5 million provided in the prior-year period. Investing used $6.2 million, including $4.5 million net for HEKA and $1.6 million of capital expenditures. Cash decreased $6.7 million over the half-year.
Outlook, commentary, risks and unusual items
- Management expects available cash, operating cash generation and debt capacity to fund current operations, potential acquisitions and capital expenditures for the next 12 months and beyond; this is forward-looking and may require additional debt or equity financing.
- Bookings were $27.6 million in Q2 and $54.3 million in the first half. Backlog was approximately $6.6 million at June 30, up from $6.0 million a year earlier; orders may be canceled and backlog may not predict future sales. Currency-adjusted bookings growth was 4.8% for Q2 and 5.1% for the first half.
- Restructuring continued, including plans to consolidate HEKA Canada manufacturing into HEKA Germany and relocate Coulbourn operations. Further charges were expected through Q3 2015, with related payments through year-end; total future charges were not clearly quantified.
- The April credit amendment extended the revolving line maturity to March 29, 2018 and reduced borrowing rates; a June amendment changed the minimum fixed-charge coverage covenant. Interest-rate swaps hedge a portion of variable-rate debt. Management estimated a 1% rate increase would raise annual interest expense by about $92,000, assuming no other changes.
- Key exposures include foreign exchange, economic and research-industry conditions, debt and covenant requirements, acquisition integration and restructuring costs, and reliance on successful product development and growth. The filing reported no material change to the risk factors in the 2014 Form 10-K.
- The first-half tax benefit was $1.1 million, with a 53.1% effective tax rate, reflecting a year-to-date calculation, forecast changes, jurisdictional earnings mix and tax items. Management said the results are not necessarily indicative of full-year performance.
- The company disclosed an underfunded U.K. pension liability of $4.6 million and future operating lease payments of $11.8 million. Specific material litigation or contingency amounts are not clearly provided in the filing text.
Important facts for investors to verify
- Whether revenue growth excluding currency effects translates into improved operating income and margins after acquisition and restructuring costs.
- Cash conversion, working-capital needs and the availability of foreign-held cash for domestic obligations.
- Debt covenant headroom, borrowing availability and the effect of acquisitions or operating performance on compliance.
- Final HEKA purchase-price allocation, integration progress, and remaining restructuring charges and savings.
- Bookings and backlog conversion into shipped sales, given the filing’s warning that orders may be canceled and backlog may not indicate future revenue.